Principles of Accounts: Financial Statements Flashcards

What is the primary purpose of the Income Statement?

Answer: To show the revenues and expenses of a business over a period

The Income Statement reports a business's revenues and expenses over a specific accounting period, resulting in a net profit or net loss.

Which of the following is classified as revenue on an Income Statement?

Answer: Sales income

Sales income is revenue — it is money earned from the business's primary trading operations.

The formula for calculating Gross Profit is:

Answer: Net Sales − Cost of Goods Sold

Gross Profit = Net Sales minus Cost of Goods Sold (COGS), representing profit earned before deducting operating expenses.

Net Profit is calculated as:

Answer: Gross Profit − Operating Expenses

Net Profit = Gross Profit minus all Operating Expenses, representing the final profit after all costs have been deducted.

Which of the following would appear as an expense on the Income Statement?

Answer: Salaries paid to employees

Salaries are an operating expense incurred in running the business and are recorded on the Income Statement.

The term 'accrued expense' in accounting refers to:

Answer: An expense incurred but not yet paid in cash

An accrued expense is a cost already incurred by the business but for which cash payment has not yet been made.

Which accounting concept requires that revenue and related expenses be recorded in the same accounting period?

Answer: Matching concept

The Matching Concept (also called the Accruals Concept) requires that expenses be matched to the revenue they helped generate in the same period.